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August 2011

Indian equity markets were back in the red in July after positive performance in June. The S&P CNX Nifty declined 2.9% over the month, while the BSE Sensex fell 3.5%, in-line with major global indices. Markets started the month weak on concerns of persisting Greece’s debt crisis and rating downgrade for Portugal. Further losses were witnessed after Moody's Investor Service put Spain's debt rating under review for a possible downgrade. Later in the month, markets sentiments dipped due to mounting worries over the US nearing a debt default on the lack of an agreement on raising its debt ceiling; though at the end of the month a consensus was formed on raising the limit. Back home, muted Q1 FY12 performance by Indian corporate added to the downfall for the markets. Negative investor sentiments persisted as RBI opted for another round of hike in interest rates; this time by 50 bps instead of the expected 25 bps. The rate hike came amidst continual slow growth in industrial output as inflation remains the core concern.

Some losses were however cut short on the back of sporadic buying by FIIs ahead of the start of the April-June earnings season and amid decline in food inflation numbers and a lower than expected rise in monthly inflation. FIIs continued to be buyers to the tune of Rs 7,411 cr in July 2011 compared with a buying of Rs 3,310 cr in June. Further gains were seen later in the month on hopes of easing of Greece’s debt crisis after European Union leaders announced a second bailout package and as hope emerged of a deal in the US to increase its debt ceiling.

Among sectoral gainers, BSE CD (consumer durables) index was the best performing index with 1.5% returns. BSE FMCG index continued its upward movement, gaining 1.2% during the month driven by expectations of good monsoon and higher demand. BSE Realty index which was the worst performer in the previous month rose 1.1% during the month of July. Broad based buying in small cap and mid cap stocks helped BSE Small Cap index rise the most, up around 2%, while BSE Midcap index rose around 1%.

Meanwhile, the impact of disappointing quarterly numbers was reflected in the performance of the metal, capital goods and Power indices. The metal stocks were the worst performers during the month with negative returns of 6.9% on reports that ministerial panel approved the draft Mining Bill, which proposed profit-sharing with people affected by their projects. The BSE CG (capital goods) index fell by 6.5% and the BSE Power index by 6.0%. 

Shares of auto and cement companies will be under focus as results from these sectors are expected in the first week of August. Further, crude oil prices still hover in the range of $105-$110 per barrel. While the RBI maintained its economic growth forecast, it has raised its inflation target for FY12 by 100 bps to 7%.  The progress of the monsoon season, its impact on food prices and impact of interest rate hike on corporate profit growth remain key monitorables. CRISIL Research expects the S&P CNX Nifty to trade in range of 5,375-5,500 (BSE Sensex 17,900-18,300).